Determinants of Primary Market Spreads on U.K. Residential Mortgage-Backed Securities and the Implications for Investor Reliance on Credit Ratings

The Journal of Fixed Income, Vol. 21, 2012, pp. 7-14

Posted: 5 Oct 2012 Last revised: 8 Oct 2012

See all articles by Frank J. Fabozzi

Frank J. Fabozzi

EDHEC Business School

Dennis Vink

Nyenrode Business University

Date Written: June 6, 2011

Abstract

In this paper, we provide empirical evidence about the credit factors that impact the pricing of newly issued residential mortgage-backed securities (RMBS) in the U.K. There is an important implication of our findings for the current debate by regulators throughout the world regarding whether investors rely exclusively on credit ratings in making investment decisions. Our results show that credit factors such as subordination level and collateral type that are taken into account by credit rating agencies when assigning a rating still have a significant impact on the new issuance spread even after accounting for credit rating. The implication is that investors do not rely exclusively on ratings.

Keywords: Residential mortgage-backed securities, Conforming mortgage-backed securities, Nonconforming mortgage-backed securities, Credit ratings, Securitization, Subprime mortgage crisis, Over-reliance hypothesis

JEL Classification: G21, G24, G32

Suggested Citation

Fabozzi, Frank J. and Vink, Dennis, Determinants of Primary Market Spreads on U.K. Residential Mortgage-Backed Securities and the Implications for Investor Reliance on Credit Ratings (June 6, 2011). The Journal of Fixed Income, Vol. 21, 2012, pp. 7-14, Available at SSRN: https://ssrn.com/abstract=2156986

Frank J. Fabozzi

EDHEC Business School ( email )

France
215 598-8924 (Phone)

Dennis Vink (Contact Author)

Nyenrode Business University ( email )

Straatweg 25
P.O. Box 130
Breukelen, 3620 AC
Netherlands

HOME PAGE: http://www.dennisvink.nl

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